LSE and Dubai go on together, with suspicious minds

By

Frank Kane in London

PublishedMonday, March 10, 2008

Clara Furse, the Chief Executive Officer of the London Stock Exchange (LSE), knows a thing or two about unwelcome shareholders. In her seven years at the LSE, she has seen off takeovers from Americans, Australians and Germans, and now finds two Gulf investors sitting on the share register with 34 per cent of the stock held between them.

But this time, neither Borse Dubai, which has 20 per cent, nor the Qatar Investment Authority, which has 15 per cent, are regarded as hostile. Both have stated their intentions to be long-term, supportive shareholders, and Furse welcomes those statements.

But there is a difference in her attitude to the rival Gulf shareholders. While Qatar is regarded as a potential partner for the development of a financial market place in the Gulf, Dubai is still held in just a little suspicion, mainly because of the fact that it acquired its shares from Nasdaq – one of LSE’s formerly hostile bidders and a major competitor.

Furse explained her attitude to the rival Gulf states to me over a lengthy meeting in the headquarters of the LSE last week. But, because of the high media profile of the LSE in the business press and the sensitivities of the Qatar/Dubai situation, she declined to be quoted by Emirates Business.

It is clear, however, that the sequence of events last summer, when in a whirlwind of share-buying activity over a couple of days, the two Gulf states built up their holdings, have determined her attitude to the rival attractions of Dubai and Qatar – and she and her board have chosen Qatar as their preferred partner in the region.

The background to that intense bout of share-buying and deal doing needs some explanation. LSE had been talking to Qatar for the past two years about closer co-operation for more than a year; Chris Gibson-Smith, the LSE chairman, has a seat on the board of the Qatar Financial Centre, and Philip Thorpe, the Qatar regulator, is an experienced operator on the London financial scene. There were already strong ties of mutual interest between LSE and Qatar.

Nasdaq, the rival American exchange, had just failed in its £2.4 billion (Dh17.3bn) takeover offer for LSE, and was sitting on a near 30 per cent holding in Furse’s company. It was obvious this stake would have to be placed in safe hands for the long-term stability of the LSE, and it appears Furse and her executives were hoping that Qatar might take up some or all of that holding.

Instead, in a cross-border deal hailed at the time as a masterstroke, Borse Dubai bought most of the LSE stake from Nasdaq, and also signed a deal to co-operate over OMX, the Scandinavian operator, and on the development of a joint venture between DIFX and Nasdaq.

Qatar reacted immediately, raiding the market to buy a big stake in LSE, apparently with LSE’s blessing. When Furse issued a statement “welcoming” the new Qatar shareholders, but saying nothing about the new Dubai members on the share register, it said it all: Qatar was regarded as a friendly ally, a potential partner – Dubai, on the other hand, was tainted by the Nasdaq connection.

In fact, Furse had been hoping Qatar might take up some or all of the Nasdaq, and there had been talks about doing just that following the failure of the American bid for LSE. Dubai’s deal with Nasdaq put an end to those negotiations, but also opened the way for the LSE-approved market “raid” by Qatar.

Executives in Borse Dubai made much of the fact that they had not been “welcomed” as shareholders by the LSE, and this still rankles with them. But in the circumstances, it is difficult to see how Furse could have made Dubai “welcome” in a formal sense – the purchase of LSE shares had been an incidental by-product of the Nasdaq deal, rather than part of a strategy agreed between LSE and Dubai.

Relations have improved since that initial period of suspicion about Dubai’s motives, and Furse certainly does not regard Borse Dubai as “hostile” any more. There have been meetings between Furse and her team from LSE with the principle executives from Borse Dubai, Essa Kazim, the chairman, and Soud Al Ba’alawy, the vice-chairman, as well as other normal investor relations communications. LSE realises it must treat a 20 per cent shareholder with respect and seriousness.

Furse has also been re-assured by recent statements from Borse Dubai that its intentions are honourable and that it will behave as a long-term supportive shareholder. The presence of two Gulf states with 34 per cent of the shares is not seen as a threat by LSE, but rather as a stabilising influence on a share register that has seen a great deal of upheaval over recent years.

In particular, Furse respects and admires the achievements of Borse Dubai, and the ambition of Dubai to be a major financial centre in the Gulf region.

But it is unlikely the relationship can be taken any further. The connection with Nasdaq – the LSE’s major competitor in the global market for stock exchange listings – and the close connections with Qatar would seem to rule this out. Furse believes, for example, that Dubai should seek Nasdaq assistance in the further development of the Dubai Financial Market, the local stock exchange on which some big regional stocks, such as Emaar, are listed.

Instead, LSE is preparing to confirm the closeness of its ties with Qatar with the announcement of a deal to support the development of the Doha Stock Market as a regional trading centre. Like the recent deal between London and the Johannesburg Stock Exchange, LSE will provide systems and technology to enhance the Doha operation, as part of a normal commercial relationship between the two exchanges.

Some way down the line, however, the logic is that the relationship will develop further, perhaps with dual listings in Doha and London (where several Middle East stocks are already traded) and with London given further access to the huge pools of liquidity in the Gulf.

In any case, London, as the world’s leading financial centre with more foreign listings than anywhere else, is already well-placed to attract sovereign wealth funds or the bigger private equity groups from the Gulf.

Furse believes that the Dubai stake in LSE will prove to be a lucrative financial investment. Despite the fact that LSE shares have fallen in recent weeks as global financial worries have deepened, LSE business has held up well, with big increases in volumes in the first two months of 2008. At the current market capitalisation of around £3.7bn, the Dubai stake is worth some £750 million.

One question Borse Dubai will have to consider in the coming months, as it plans the next phase of its ambitious international expansion strategy, is whether the best use of that cash is to leave it tied up in the LSE. That depends on the share-price performance of the London market.

For the time being, the financial interests of Borse Dubai and London coincide. Furse recognises that, and is determined the London market will come through the current storm in world markets with its place intact as the leading financial centre for international companies.

Dubai can only benefit – financially and educationally – from the relationship with LSE, despite the misunderstandings that accompanied its origins.

Clara Furse

Clara Furse has been chief executive of the London Stock Exchange since 2001. She is the first woman to hold the job.

Born in 1957 in Canada to Dutch parents, she was educated in Columbia, Denmark and Britain, and graduated from the London School of Economics (“the other LSE” as she has called it) in 1979.

After an early career in stock broking, she worked for the London International Financial Futures Exchange before moving to the LSE.

She has been fiercely protective of the LSE’s independence, and is credited with successfully fending off several hostile takeovers during her seven-year term.

Last year she was named among the Top 100 Most Influential People in the world by Time magazine.